04/20/2012

Under California's new Wage Theft Protection Act of 2011 (AB 469 (Chapter 655, Statutes of 2011); Labor Code section 2810.5), which became effective on January 1, 2012, an employer must give every new hire a form of notice at the time of hire that, in general, identifies the employer, states the employee's wage rates and pay-day schedule, and provides workers' compensation coverage information. The Labor Commissioner was mandated to develop the form and make it available. Since December, the Labor Commissioner has twice revised its new form, most recently effective April 12, 2012. A Word version of the new version of the form can be found here. In addition, the Department revised its Frequently Asked Questions regarding the new law and the form, which can be found here.

The new form has been simplified, and the employee's acknowledgement of receipt is now optional. An employer does not have to re-issue the new version of the form if an earlierapproved version was used before April 12, but new hires after that date must be given the revised form.

Other components of the new law remain in place: employees must be notified in writing within seven days of any changes to the information in the form, unless the changes are reflected on a timely wage statement.

08/04/2011

On July 15, 2011, minor amendments to the Lead Renovation, Repair, and Painting Program (“RRP”) rule became final, making this a good time to revisit that rule, which became effective last year. Published by the U.S. Environmental Protection Agency (“EPA”), the RRP rule establishes training, certification, and work practice standards for persons performing renovations that disturb lead-based paint in pre-1978 housing and child-occupied facilities.

The RRP rule is certainly far-reaching and important for almost anyone in the construction industry. Requirements covered by the rule include:

• pamphlet distribution (provide owners and occupants with Renovate Right before work commences);• individual training (completion of 8-hour course given by accredited trainer);• firm certification (application to EPA, with $300 fee for standard certification);• job-site training (for non-certified workers);• paint-testing or assumption that paint is lead-contaminated (in California, only State Certified Lead Inspector/Risk Assessors permitted to test for lead-contamination – thus, contamination must be assumed absent a certified inspector’s finding to the contrary); and• lead-safe work practices.

The rule’s requirements are complex, and applicability may be sometimes hard to determine. A useful rule of thumb, however, is found in the EPA’s (Small Entity Compliance Guide to Renovate Right), which states: “In general, anyone who is paid to perform work that disturbs paint in housing and child-occupied facilities built before 1978 (is subject to the RRP rule).”

Contractors are obviously the group most affected by the RRR rule, but it doesn’t end there. For example, an individual who does handyman work on covered property is subject to the both the firm certification and individual training requirements.

The possible penalties for failing to follow the RRP rule? According to the Small Entity Compliance Guide (p. 15), the EPA “may file an enforcement action against violators seeking penalties of up to $37,500 per violation, per day. The proposed penalty in a given case will depend on many factors, including the number, length, and severity of the violations, the economic benefit obtained by the violator, and its ability to pay.”

Whether you consider it an overly-intrusive regulation or a welcome public health measure, the RRP rule is something that anyone who is compensated in connection with work on housing and child-occupied property built before 1978 should be familiar with.

04/15/2011

Though it is not well-publicized, the Santa Clara County Recorder’s Office has a policy of delaying the recordation of a Deed where the transferor claims a transfer tax exemption under subsection (d) of section 11925 of the California Revenue & Taxation Code (i.e., the transfer “results solely in a change in the method of holding title … and in which proportional ownership interests … remain the same immediately after the transfer.”). To the unaware, this policy could have significant consequences.

As described in an April 25, 2007 Memorandum issued by the County, due to the complexity of subsection 11925(d) transfers, the County advises submission of certain supporting documentation 5 days in advance of the recording date. Of course, those poor souls who have not read this Memo and are otherwise uneducated about this process will be caught unaware … then be forced to gather the required documentation, supply it to the Recorder, and wait. Such delays can have real consequences.

For example, suppose a group of individual investors get a great price on a large commercial property in Sunnyvale in a quick-turnaround, all-cash deal. Next, the group wants to pull the majority of their money out, so they obtain a commitment on favorable terms for a non-recourse loan to an LLC they’ve formed to hold the property … and the commitment is good through Friday. The investors don’t submit the Deed for the individuals-to-LLC transfer to the Recorder until the Wednesday before, and since they have (properly) claimed an exemption under subsection 11925(d), the Recorder places a hold on the Deed. This leaves the group with a choice from the following unenviable alternatives: (i) pay the tax ($1.10 per $1,000 of value transferred) and later try to secure a refund from the County, (ii) cancel the transfer and take out the loan in their personal capacities, or (iii) lose the loan. The obvious solution: submit the Deed and required documentation well in advance. But what does “well in advance” mean? And what is the required documentation?

Those answers will depend on the situation. The County’s Memorandum is extremely vague about the required documentation. It indicates a 5-day review period, but that cannot be relied upon in a situation where it is uncertain exactly what documentation is required.

The best advice may be as simple as this: submit the Deed with the appropriate documents to demonstrate that the 11925(d) exemption applies, whatever those documents may be, and accompany those documents with an explanatory cover letter, or “roadmap”. The cover letter should also give a contact with whom the Recorder can follow up for additional information. Of course, title companies will already be involved in many cases, and parties should look to them for guidance in such cases.

03/06/2011

In 2001, in the wake of increased concerns over deleterious health impacts of multicellular fungi, or mold, found in indoor environments, the California Legislature enacted a comprehensive protection scheme called the Toxic Mold Protection Act of 2001 (“the Act”). The law directed the former Department of Health Services (now the Department of Public Health, or “DPH”) to investigate the feasibility of establishing permissible mold exposure limits in indoor environments, which would potentially then lead to remediation requirements, disclosure obligations and lawsuits. The mysteriousness of mold and its rumored potential to cause severe health impacts caused nervous anticipation among real estate professionals.

Looking back now, 10 years later, the Act looks like much ado about nothing. Though the most recent update found on the DPH website is dated July 2008, it looks as though the Act remains stuck in the research stage, far from implementation, with inadequate funding to perform adequate additional research. Aside from lack of funding, the underlying roadblock to Act implementation seems to be the inherent difficulty of acquiring adequate scientific data.

According to reports published by the DPH on its website, the scientific results have not yet adequately shown the relative role played by mold versus the various other contaminants that are common in complex damp indoor environments (such as bacteria, dust mites, cockroaches, and irritant chemicals released by degradation of wet building materials). As for funding, in its latest-published implementation update (July 2008), the DPH stated, “DHS will proceed with implementation when funding is in place to address the bill requirements.” Considering the state of the economy in general and the State budget specifically, it seems unlikely that there has been much movement in Act-implementation since this update was published.

03/04/2011

Owners of California dwelling units, especially rentals, that have (i) a fossil fuel-burning heater, appliance or fireplace (for example, a gas stove or water heater) or (ii) an attached garage, need to be aware of a new law passed in 2010 regarding carbon monoxide devices. Under newly-enacted sections 17926, 17926.1, and 17926.2 of the Health & Safety Code (part of Senate Bill No. 183), owners of all such properties (excepting properties that are, generally-speaking, owned by or leased to the government) must install carbon monoxide alarms by the following deadlines: (1) July 1, 2011, as to single-family dwellings, or (2) January 1, 2013, as to all other dwellings.

(The deadlines are subject to extension for up to 6 months if the State decides more time is necessary to make approved alarms available; if such postponement were made, the Department of Housing and Community Development must post a public notice on its website).

To satisfy the requirements of the new law, alarms must be approved by the State Fire Marshal. The State Fire Marshal’s web site maintains a listing of carbon monoxide alarms and detectors; it appears as though the alarms and devices on this listing meet the requirements of the new law, but this should be confirmed by owners. The new law imposes a $200 maximum fine on owners for each violation of the installation requirements, provided that a 30-day notice must be provided to cure the violation. Perhaps more important, however, would be the implication or presumption of negligence created by a violation of the new law in any case where persons or property are injured or damaged as a result of a carbon monoxide leak.

Health & Safety Code section 17926.1 covers requirements specific to rental units, including the owner’s (or owner’s agent’s) maintenance requirements. Also covered are permission-to-enter and device-failure notification requirements imposed on tenants. With the law now clear on the required presence and maintenance of carbon monoxide alarms in qualifying rentals, it is critical for any rental unit owner to meet all applicable requirements of this new law.

It’s no secret that, these days, many commercial property owners are having trouble meeting their mortgage payments. If you are a tenant of such an owner in California, you should know about section 2938 of the California Civil Code (“Section 2938”).

Section 2938 requires, under certain circumstances, a commercial tenant to pay rent to its landlord’s creditor rather than its landlord. This requirement may arise when the landlord has conditionally assigned the right to receive such rent to the creditor - normally a bank, with repayment of its loan secured by a deed of trust against the leased property. When the landlord defaults under its obligation to the creditor - normally nonpayment on the loan – then, provided the creditor has followed the proper Section 2938 procedures, the creditor may compel the tenant to make rental payments directly to the bank.

The triggering procedures are spelled out in Section 2938. While the statute covers a variety of remedies to enforce an assignment of rent, the focus of this discussion is the direct demand remedy – compelling a commercial tenants, upon the receipt of a simple notice from a creditor with whom it has likely never dealt before, to pay the rent to that creditor, rather than the landlord.

Direct demand notices must be in a statutorily-prescribed form. Upon receipt, the tenant is required by law to begin making rental payments to the creditor, and this obligation typically continues until receipt by the tenant of another written notice from a court or the creditor. To provide a measure of protection to the tenant, the statute makes exceptions, such as where the tenant has previously received a Section 2938 notice from another creditor or the tenant has made a legitimate, good faith payment to the landlord within 10 days following receipt of the notice. The statute also makes it clear that the tenant’s rental obligations are satisfied to the extent paid to a creditor in accordance with Section 2938.

Bottom line: it is critical that any commercial tenant receiving a notice to pay rent to a 3rd-party take that notice seriously, and consult with legal counsel if there is any uncertainty about what to do next.

11/12/2010

Many tenants are likely to see a big shift in their balance sheets in coming years. The Financial Accounting Standards Board (FASB), together with the International Accounting Standards Board, has proposed a comprehensive set of changes in the generally accepted accounting practices (GAAP) for leases.

In an Exposure Draft issued August 17, 2010, which commentators say is likely to be adopted, FASB has proposed a fundamental shift in lease accounting. Perhaps most significant is the proposed change from operating to capital treatment of leases – that is, requiring tenants to place the obligation to pay rent over the entire lease term on their balance sheets as a liability, where before only the current rent was booked on the financials, as an expense on the income statement.

In calculating the long-term rental obligation, contingent payments such as “percentage of sales” rent would be required to be estimated and included in the total. When addressing renewal options, accountants preparing financial statements under the new GAAP standards would be required to use the longest term that is more likely than not to occur. Tenants will discount the full stream of rent payments to present value, using their borrowing rate.The rent liability will be offset by an equivalent asset, representing the right to use the leased premises. Both the asset and liability totals attributable to leases diminish over time as the expense is booked.

While both sides of the balance sheet are grossed up under the new rules, many tenants – especially those with large lease portfolios – will not be happy seeing their debt loads suddenly balloon and their financial picture appear shakier. And existing leases are not slated to be grandfathered in under current rules, meaning that the predicament may already be somewhat of a foregone conclusion for many companies.

Final comments on the proposed standards are due December 15, 2010 and final standards are estimated to be issued in the middle of 2011. Actual implementation is estimated to be no sooner than January 1, 2013. In the meantime, many tenants can be expected to take the new standards into account in structuring and negotiating their lease deals, as tenants seek to alleviate the impact of the new standards. For example, large retail chains may switch to a policy of shorter lease terms in order to offset the impact of the new standards.

10/26/2010

If you answered “Yes” to both questions, and if you want to be able to buy with less than 20% down – or make your condo more attractive to those types of buyers – you would be wise to check on the FHA approval status of the condominium project. With the passing of the Housing and Economic Recovery Act of 2008 and the enactment of new FHA mortgage-qualification rules implemented in late 2009, condominiums are now FHA-approved solely on a project-wide basis (as opposed to spot approvals of individual condominiums, as permitted in the past).

So, checking the condominium project’s FHA-approval status is step #1. If approved, determine when the approval expires. If not approved, determine the reason: approval may have expired, been rejected, or simply not yet have been sought, or there may be some other hold-up.

If approval was denied or there is a hold-up, unit-owners in the project should encourage speedy rectification of the problem – if possible. It may not be possible to overcome certain problems in the near term because in addition to the elimination of “spot” approvals, other rule-tightening has taken place. For example, a condominium project already beyond the 30% maximum concentration level for FHA-backed loans may have to await approval until the concentration level is reduced.

With the tightening of lending standards across the board since 2008, FHA-backed loans have become perhaps the leading source of low down-payment home loans. Yet condominiums can be particularly difficult targets of such financing, due to the new, tighter FHA rules.

10/01/2010

Kathryn Andrews, a member of our Business Group, gave a presentation to the Sonoma County Bar Association on September 21, 2010, on "Valuation of Minority Interest in an Involuntary Dissolution." This is a hot, but widely misunderstood, topic of particular importance in this economic climate. You can see a her presentation outline here.

09/07/2010

A recent case by a California Court of Appeal provides a reminder for homeowners and contractors that California’s requirement that “home improvement contracts” must be in writing does not necessarily prevent a contractor from enforcing an oral contract for payment, when fairness and justice so require; and, that a homeowner’s tactics in dealing with a contractor should be considered very carefully.

Hinerfeld-Ward, Inc. v. Lipian (Sept. 1, 2010), involved a complex home improvement project. The homeowners did not have a written contract with the contractor, as required by California law. The Lipians retained Hinerfeld as their contractor and work proceeded for the next two years, through 19 invoices. The Lipians’ architect approved all of these bills, which were paid by the Lipians, until April 2006, when they disputed certain charges on the twentieth invoice. At the time, the Lipians owed their contractor over $200,000. Because of the dispute the Lipians terminated Hinerfeld. Hinerfeld sued for payment, even though he did not have a written contract. The Lipians asserted their own claims against the contractor for fraud, breach of contract and defective work, and, significantly, claimed they owed nothing because the oral contract with Hinerfeld was void and unenforceable. They contended that California’s statutory requirement that all “home improvement” contracts must be in writing prevented the court’s enforcement of the “void” oral home improvement contract. The trial court disagreed and awarded Hinerfeld damages of $202,181, plus interest of $36,232, costs of $38,953, a monthly two percent assessment of $54,736, and attorneys’ fees of $200,000. The Lipians appealed, but the Court of Appeal also ruled against them, and affirmed the trial court judgment.

California law requires that a contract for home improvements between an owner and a contractor must be in writing and contain specific provisions. (Business & Professions Code section 7159). The Lipians contended that an oral contract violates the statute and is void, and could not be enforced by the contractor. The appellate court disagreed, stating that other factors established that it would be unjust to declare the contract void, including: (i) the Lipians were sophisticated individuals, and not within the class of unsophisticated consumers intended to be protected by the statute; (ii) the contract in question, for a unique, long-term, ever evolving construction project, was not the type that California’s public policy would declare void; (iii) the owners’ relationship with their architect, as their representative, was long-term and well-established, and served to protect the owner’s interests; and, (iv) the owners had accepted the benefits of the agreement. In summary, the court said that “…this is a compelling case warranting enforcement of the oral home improvement contract…” All of factors combined to support enforcement in favor of the contractor.

Thus, this case was a disaster for the homeowners. Their difficulties were compounded by how they handled the final payment application submitted by the contractor.

California law restricts the ability of a homeowner to hold back progress payments by limiting any amount withheld to 150% of value of any disputed item. Rather than paying the amount that was undisputed, they withheld the entire amount of the billing, thus violating the statute. (The jury actually found that the Lipians were entitled to only $1,000). The court strictly applied the statute against the Lipians. Their violation cost the them the additional statutory penalties and attorneys’ fees, which are authorized by the statute. So, the aggressive tactic of withholding the entire amount of a contractor’s billing seriously back-fired on the Lipians.

In any business relationship it is important to “get it in writing.” But, as this case shows, even if a statute requires a written contract, exceptions will always exist, especially when a strict reading of the statute would work an injustice. This case offers a number of lessons on how to manage and document a successful home construction project – some of them strategic, some of them psychological and some of them legal.